Financing a business endeavor-franchise or otherwise-can be a major hurdle for prospective business owners. To finance their dreams, most potential business owners tap into savings and investments, cash out the equity in their homes or find investors among friends and family. Rarely does this gathering of funds cover all of the costs of starting a business. Additional capital is often needed to fill the gap, and business owners look to financial institutions to provide this capital. For many minority business owners, however, this need goes unfulfilled.

Demand for capital in the minority business community is estimated to be in excess of $144 billion per year, yet only a small portion of that amount is being supplied. Despite this growing need, minority-owned businesses continue to be overlooked in the financial arenas. Numerous studies have found that minority-business owners face greater obstacles to securing adequate capital.

A 1998 paper published by the National Bureau of Economic Research found that "black-owned small businesses are almost three times more likely to have a loan application denied. Even after controlling for the differences in credit-worthiness and other factors that exist between black- and white-owned firms, blacks are still about twice as likely to be denied credit." Moreover "black-owned firms pay higher interest rates as well."

A 1993 study entitled "Banking on Black Enterprise" found that the average white loan recipient was awarded $1.79 in debt capital for every dollar of equity he or she invested. An equal black business borrower received only 89 cents of debt capital for each dollar of equity.

The difference in minority lending is even more astonishing when you compare the minority business lending rate to the minority mortgage lending rate, where minorities are denied business loans 3.5 times more than minorities applying for mortgage loans.

According to Glenn Yago, director of capital studies for the Milken Institute, this difference is directly "attributed to the existence of special programs and regulatory incentives that encourage banks to increase mortgage lending in the minority communities and also the well-developed secondary market for mortgage loans. In other words, pooling loans and then reselling them in the secondary market appears to reduce the likelihood of racial discrimination in credit lending."

Lack of Equity

Although this lending gap clearly contributes to a depressed minority business environment, one of the biggest barriers to increased minority business ownership is a lack of equity. Minorities often do not have the required equity to qualify for a business loan, due to an overall lack of wealth as compared to the typical American household:

* The median net worth of minority households was one-quarter the net wealth of the typical American household-$24,750 for blacks and $29,650 for Hispanics vs. $115,000 for whites. This wealth gap is much greater than the median income gap between African-American households and all American households-$27,900 vs. $40,800.

* 33 percent of African-Americans save for retirement as a priority compared with 54 percent of Caucasian Americans.

* Average retirement savings for African-Americans earning over $50,000 is $44,000 while whites with the same income average $69,000.

* A number of minority organizations-African-American, Hispanic and Native American-have begun to educate minority families about the importance of wealth accumulation for the long-term vitality of minority families and communities. By outlining the steps minorities can take now to improve their net worth and overall wealth, some of the problems of access to capital will lessen.

These efforts will take some time to produce meaningful results, however. Already, increased business ownership among minorities has depended largely on the effects of expanded educational opportunities created for minorities in the 1960s and 1970s. The beneficiaries of those expanded opportunities are now just reaching the age when entrepreneurial potential is at its peak-between 35 and 50. That is a 30 to 40-year gap between policy implementation and the desired results (as it relates to business ownership.) Fortunately, while efforts to increase minority wealth progress, there is a growing number of organizations that are creating programs and financial products to help more would-be minority business owners start and successfully operate a business right now.